Topic
Managing the interface with other regulators: whether it is lawyers, who provide financial services in a firm that need to be regulated, or co-regulators for those who permit MDPs?
Brief History/Background
The Society’s solicitor members have traditionally conducted financial services as part of their business activities. Up until 1988 this financial services work was solely regulated by the Society. Our last practice rules – not approved by a third party independent financial services – were the “The Solicitors (Scotland) Dealers in Securities (Conduct of Business) Rules 1985.
A major change in the UK’s regulatory system for financial services work was introduced with the commencement of the Financial Services Act 1986 on 1 August 1988. The first UK financial services regulator was the Securities and Investments Board (SIB). Since that date in 1988 the Society and its members engaged in financial services work have been “coregulated” in some form. This co-regulation is irrespective of the fact that the Society’s own MDP regime will not be fully implemented until next year.
The current UK Act governing financial services work is The Financial Services and Markets Act 2000 which was substantially amended following the financial crisis in 2008.
Key Factors
From the Society’s perspective this system of co-regulation in the financial services field does work and has worked for the last 32 years. The Society has worked with three co-regulators over this period – The SIB, The Financial Services Authority and now The Financial Conduct Authority (FCA).
This form of co-regulation involves oversight of the Society’s financial services regulatory regime by the FCA. The FCA does not involve itself directly in the regulation of our members under our own financial services practice rules. However, those practice rules have to be approved by the FCA.
This form of co-regulation with the FCA works successfully for a number of reasons which are:
- The governing statute clearly defines the financial services work a solicitor or other professional person may conduct under their own professional body.
- The governing statute clearly defines the role of the professional body and the financial services regulator.
- A good working relationship is established and maintained between the professional body and the financial services regulator. For this to be achieved the lines of responsibility in a) and b) above have to be clear. There should also be a clear reporting system by a professional body to the financial services regulator.
While this system of co-regulation works well for Scottish solicitors and their practices, it does so partly because the form of financial services work is very low risk and such work is an integral part of our members’ traditional provision of legal services. Other legal regulators could adopt a different approach which could be influenced by the following factors:
- What is the nature and risk of the financial services work to be conducted in the MDP?
- Is a financial services regulator better placed in terms of resources and knowledge to manage that risk?
- What will be the cost to members and ultimately the public in such a system of coregulation? In the UK financial services work is fee based and perceived as being expensive.
- Will there be “regulatory gaps/misunderstanding” between the professional body and financial services regulator?
- Will there be public confusion in a system of such defined co-regulation? The public would need to be clearly advised on which regulator is responsible for what? Some communication has to be clearly written from the customer’s perspective.
I hope that these points and the Society’s own experience in this area will help the discussion.
Lorna B Jack,
Chief Executive, Law Society of Scotland